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When debts get out of control you may be asking should I consolidate my debt? Well, if you’re asking, it’s highly likely you should give it some thought. In this guide, we’ll give you a lot to think about.

Key Factors:

  • Ways of overcoming debt include working with a creditor to settle your debt, using your home equity line of credit or finding a favorable debt consolidation loan
  • ‘Debt’ can be from credit cards, student loans, personal loans, and auto loans
  • When surveyed, 70% of individual Americans didn’t actually know how much debt they had
  • Credit card debt totaled $841 billion in the first quarter of 2022
  • Debt consolidation loan interest rates can range from 5.7% up to almost 36% depending on your debt and credit score

What is Debt Consolidation?

If you’ve never consolidated debt before let’s first talk about what it actually is. Debt consolidation is when you take all your different debt obligations, or types of debt, and put them all together in a more favorable position. Say you have 2 credit cards, a student and a car loan and you’re struggling to make your interest payments, debt consolidation could make sense for you.

Why Should I Consider Debt Consolidation?

The goal of debt consolidation is to take your high-interest charging products and combine them in one place so you are only making one payment each month for all of them. This works great when you can find a lower-interest charging place for them.

For instance, many banks allow you to transfer balances at 0% interest for 6-12 months. Since one of the biggest reasons debt can spiral out of control is the super high interest that accrues daily or monthly. The extra time with a no-interest loan can really make the difference in being able to pay off your debt.

Added Bonus to Debt Consolidation

When your debt is spread out in 2, 3, or more places it’s kind of easy to forget or ignore what’s truly going on. With everything in one place, it’s hard to ignore. If you have a debt problem, seeing all your debt in one place can really bring home how out of control your spending and debt are or were.

What Do I Need to Do to Consolidate My Debt?

You can investigate the different ways of consolidating your debt and then decide which is best for you. Having said that, depending on your credit score your choices will be different. Low or poor credit scores will limit your options.

  1. Check out 0% interest credit cards. With one of these cards, all you need to do is take the debt from your other cards and transfer them to the new one. Keep in mind that after the initial 0% interest period, interest will begin to accrue. To avoid this, pay off the balance before the end of your 0% interest period. In addition, these are generally only available if you have a good credit score. This would be anything over 690. Check your credit score now.
  2. Investigate a debt consolidation loan. If you take out a loan like this, it only makes sense if the interest rate is lower than what you are paying now. Interest rates on debt consolidation loans can range from 5.7% up to almost 36%. It depends on your debt and credit history.
  3. Lender Payment: Once you’re approved, the lender deposits a lump sum in your bank to pay off your debts. Then hopefully your only loan is this one so you have one payment to make each month. You can possibly, qualify for a debt consolidation loan even if you have bad credit (under 689) but the interest rate you’re offered would not be as good as if you had a good credit rating.
  4. Using Your Home or Retirement Fund: Another option would be to borrow against your home loan or your retirement fund. Think long and hard before doing this as this type of loan, if not paid back, could mean losing your home or impacting your quality of retirement.

When Would Debt Consolidation Not Be Good for Me?

This type of loan would not be good for you if the loan consolidation loan you find does not have a more favorable interest rate or is lower than what you are paying now. While this action will put all your current debt in one place for easier management, it will not take into account future debt. For that reason, the consolidation of previous debt won’t be as big a help if your spending habits will lead you into lots more debt.

In addition, if after debt consolidation you would still be swamped by debt repayments, you may need to look for other solutions.

On the flip side if your current debt isn’t stressing you and you are able to manage it then consolidating doesn’t make sense. Consolidating comes with a fee that would more or less be a waste with your manageable debt situation. Or it may save you a little bit but not enough for the bother of arranging the consolidation.

Is There a Better Choice Than Debt Consolidation?

Are you looking to repay debt differently? Do you want to pay the smallest amount of interest? You may want to try the avalanche or snowball methods when paying off your debt.

If the total amount of your debt is over 50% of your income and even when consolidating it will still be over 50% of your monthly income, then you should look to get debt relief instead.

Should I Consolidate My Debts If I Have Bad Credit?

It will depend on whether your debt consolidation loan. If it makes your financial state better, then it’s probably worth it. But if due to your bad credit you are only offered higher interest rates than what you’re paying now, run the other way!  Before you commit, put together a complete list of your debt, the interest rates you’re paying the extra fees associated with any late payments. Then look at what interest you’d be paying on with the full amount of debt using a consolidation loan. Do you see a savings? Then you may want to go for it.

When Is Debt Consolidation a Good Option?

There are a couple of things to keep in mind if you’re considering debt consolidation. Debt consolidation is a good option if:

  • The debt payments you make on everything (student loan, rent, car payment, home) make up more than 50% of your gross income each month.
  • You have a credit score high enough to apply for and get a credit card with a 0% interest rate for a set period that you transfer the debt to.
  • Your income allows you to make the monthly payments needed to repay the debt consolidation loan every month.
  • You’ve budgeted to pay it off in 5 years and stick to that budget.

How Will I Know If I’ll Save Money When I Consolidate My Debt? 

Say you have 3 credit cards, all with really high-interest rates.

  • Credit card 1: 17%
  • Credit card 2: 23%
  • Credit card 3: 27.99%

Those are all high interest rates! So, if you’re not paying off your balances in full each month you’re paying out a lot of interest each month.

If you go for a debt consolidation loan and have a pretty good credit score you may qualify for a loan at 8% or even better depending on your credit score. Combining all the debt on those 3 credit cards at double-digit interest rates into one single-digit rate could mean a significant savings in interest payments and make it a lot easier to pay back.

Bottom Line:

A debt consolidation loan could help you get out from under that overwhelming debt, but you need to make sure that the one you take on truly improves your situation. It has to have a much lower interest rate than what you’re currently paying in total or it might not be worth it. Or at least it wouldn’t be significant savings. In addition, if your spending continues to get you deeper into debt then addressing spending first may be the answer for you.  If you need financial help, get it. It may cost a bit but you’ll save in the end.

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